Ken’s daughter Tina’s boyfriend, Jason, needed to borrow $6,000 to buy a car. Jason had a bad credit history, so the lender said Jason would need a guarantor. At the time Tina and Jason were living with Ken, Jason had a stable job, and needed a car to get to work. Ken was happy to act as a guarantor on the loan and easily met the lender’s affordability requirements. Jason also met the affordability requirements. The lender registered a security interest over the car. For about 18 months Jason made all the loan repayments without incident.
The problems started when Jason and Tina separated. Jason moved to a new city and changed jobs. Without telling the lender that his circumstances had changed, Jason applied for a further $3,000. He explained to the lender that the gear box on his car was beyond repair and he needed to buy a new car. The lender approved the loan, registering a security interest over the new car.
Shortly after borrowing the additional $3,000 Jason started defaulting on the loan. The lender tried to repossess the car but neither Jason nor the car could be found. The lender contacted Ken and asked him to repay the debt that was now about $9,000. Ken thought this was unfair and complained to FSCL.
Ken could not understand how the amount had increased so much. Ken said the lender should repossess the car and, if there was a shortfall, pursue Jason for the debt. Ken agreed that he was the guarantor, and understood he was liable if Jason defaulted on the loan but did not accept that the lender had done enough to recover the debt from Jason.
The lender responded that they could not find Jason or the car and as Ken was the guarantor, he was liable for the debt.
We began by looking at the original loan application and were satisfied the lender had complied with their responsible lending obligations with respect to the first loan application. We could also see that the lender had gone to considerable effort to find Jason and the car.
However, when we looked at the $3,000 loan top-up agreement, Ken’s signature on the agreement was obviously a forgery. We asked Ken if he knew about any further loans and Ken said he did not. There was also no record of any information obtained from either Jason or Ken to show that the additional $3,000 loan was affordable.
We went back to the lender and said we did not think the lender could recover the additional $3,000 from Ken. The lender immediately agreed but said that Ken was still liable for the original debt.
To acknowledge their mistake around the $3,000 lending, the lender offered to reduce the debt to $1,750, to be paid over time with no interest or fees. The lender calculated this amount by taking the full amount of the remaining debt, $9,500, dividing it in half, to represent Jason and Ken’s share, and removing the $3,000 from Ken’s share, as they agreed Ken was not liable for that debt. The lender offered to further reduce Ken’s share of the debt to $1,600 if Ken paid the debt in one lump sum.
We thought the offer seemed reasonable, given the fact that the loan balance was down to about $4,000 the day before the $3,000 was borrowed. If the $3,000 had not been advanced and Jason had disappeared at that point, Ken would have been liable for the $4,000.
Ken accepted the settlement offer and said he would pay the $1,600 immediately. However, when we asked Ken to sign the settlement form, a standard part of our process, Ken started coming up with reasons not to sign the form. Eventually Ken said that he wanted to withdraw his complaint from our process and pursue the matter privately. We had no option but to discontinue our investigation.
Insights for consumers and participants
If you sign a guarantee, you are liable for the full amount of the debt if the main borrower defaults on their repayment obligations. Obviously, the lender should not have loaned Jason a further $3,000 without Ken’s permission, but this did not affect Ken’s obligation to repay the original amount owed. We were disappointed that Ken withdrew from our process as the lender would be entitled to pursue Ken for the full amount of the debt owed before the $3,000 was advanced, and the settlement that had been proposed was fair.